Stewardship theory of corporate governance

Written by walter johnson

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Most theories of corporate governance use personal self interest as a starting point. Stewardship theory, however, rejects self-interest. Agency theory begins from self-interested behaviour and rests on dealing with the cost inherent in separating ownership from control. Managers are assumed to work to improve their own position while the board seeks to control managers and hence, close the gap between the two structures.

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Motivation

For stewardship theory, managers seek other ends besides financial ones. These include a sense of worth, altruism, a good reputation, a job well done, a feeling of satisfaction and a sense of purpose. The stewardship theory holds that managers inherently seek to do a good job, maximise company profits and bring good returns to stockholders. They do not necessarily do this for their own financial interest, but because they feel a strong duty to the firm.

Identification

Agency and stewardship theories begin from two very different premises. The basic agency problem revolves around individuals considering themselves only as individuals, without any other meaningful attachments. However, stewardship theory holds that individuals in management positions do not primarily consider themselves as isolated individuals. Instead, they consider themselves part of the firm. Managers, according to stewardship theory, merge their ego and sense of worth with the reputation of the firm.

Policies

If a firm adopts a stewardship mode of governance, certain policies naturally follow. Firms will spell out in detail the roles and expectations of managers. These expectations will be highly goal-oriented and designed to evoke the manager's sense of ability and worth. Stewardship theory advocates managers who are free to pursue their own goals. It naturally follows from this that managers are naturally "company men" who will put the firm ahead of their own ends. Freedom will be used for the good of the firm.

Consequences

The consequences of stewardship theory revolve around the sense that the individualistic agency theory is overdrawn. Trust, all other things being equal, is justified between managers and board members. In situations where the CEO is not the chairman of the board, the board can rest assured that a long-term CEO will seek primarily to be a good manager, not a rich man. Alternatively, having a CEO who is also chairman is not a problem, since there is no good reason that he will use that position to enrich himself at the expense of the firm. Put differently, stewardship theory holds that managers do want to be richly rewarded for their efforts, but that no manager wants this to be at the expense of the firm.